Nokia Remains Windows Phone Top Vendor But Faces Uncertain Oulook

Mitigates concerns of Nokia facing the same competition in WP
as in the Android market.

Though it's still early days, initial usage data shows WP was
a better choice for Nokia than Android.

Long term prospects are still cloudy as WP's future is
uncertain in a highly duopolistic marketplace.

Nokia's (
NOK
) faith in Windows Phone seems to be paying off for now. Not
long after Nokia announced a strong set of Q4 results last month,
we have AdDuplex's February issue of Windows Phone usage stats show
that Nokia continues to dominate the WP market. According to the
report, Nokia has a 78% share of the market, compared to HTC's 14%
and
Samsung's
(
SSNLF
) 6%. What is reassuring for the company is that in the past
three months, Nokia has managed to gain a couple of percentage
points in market share at the expense of Samsung, as has HTC.
Considering that Samsung and HTC are heavily invested in Android,
we believe this to be an accurate representation of the amount of
commitment that each of these handset makers have towards the
Windows Phone platform.

The report helps put to rest concerns about Nokia not benefiting
much from going with Windows Phone given that the handset maker
isn't Microsoft's exclusive partner. Further, it backs Nokia's
reasoning that Windows Phone has given it a much better chance than
Android - at differentiating itself from rivals and surviving in an
industry that is dominated by the duopoly of Apple and Samsung. The
report also shows why Nokia has steadfastly shown its commitment to
Windows Phone despite repeated calls to hedge its bets by
developing Android phones as well.

We find it hard to ignore the logic behind
Nokia's argument. Going with Android would have put Nokia
in direct competition with not only Samsung and HTC, but also Sony,
LG and a horde of handset manufacturers in the emerging markets. It
would have entered the Android fray a little too late, struggling
not only to differentiate itself from the crowd, but also against
the marketing might of Samsung. We are already seeing the amount of
control Samsung is exerting on the Android ecosystem, and rivals
such as HTC struggling to compete despite bringing to market highly
competent phones. It is important to remember that HTC's decline
followed its rise to the top of the U.S. smartphone market in
Q3 2011. Considering that Nokia is coming from lows in the
smartphone industry, it is tough to see how Nokia would have fared
any better had it sided with Android.

Moreover, Windows Phone allows Nokia to get more marketing might
behind the Lumia brand. Not only is it in the interest of Microsoft
to promote the platform, but also for the carriers who are looking
to increase competition in their supply chain and gradually
decrease the impact of smartphone subsidies. With Android, Nokia
would have been on its own since Google has no reason to promote
the Lumia, considering Android's already rising popularity and its
own acquisition of Motorola's hardware assets.

Uncertainty Still Persists

We believe that adopting the Windows Phone has given Nokia a
fighting chance in the smartphone industry, but its long term
ambitions are still tied to the sustainability of Windows Phone, as
a viable third alternative to iOS and Android. There is currently a
lot of uncertainty surrounding BB10′s reception in the markets, but
if the new OS has put BlackBerry back in contention, Windows Phone
might have to start eating into Android's and iOS' market share in
order to grow - the odds for which seem pretty low. Despite Lumia's
strong holiday quarter, it is tough to say which way market share
might swing in the coming years. Accounting for this risk, we
estimate that sales in the developed markets account for less than
10% of our $5 price estimate for Nokia.

Still, we continue to believe that even a small
improvement in Nokia's handset business, together with its
patent monetization initiatives
and the ongoing turnaround in the wireless infrastructure joint
venture with Siemens, should help it realize what we expect to be
fair value of Nokia's stock at this juncture. Trefis' $5
price estimate for Nokia is about 25% ahead of the current market
price.

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